In years prior to 2020, owner-only businesses had to establish / adopt the self-directed solo 401k by their business year end which was December 31 for most businesses.
This all changed for the better, however, for future tax years starting with 2020 due to the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which is part of the Further Consolidated Appropriations Act, 2020 (FCAA) and President Trump made law in late December 2019. Thanks to the new law, owner-only employers can now adopt the solo 401k plan by their business tax return due date plus business tax return extensions. Basically, the solo 401k plan establishment deadline is now based on the business tax return due date instead of the business tax year end. Note that a business’ tax filing deadline depends on the business type (e.g., sole proprietorship, partnership, LLC, S-corporation, or C-corporation).
While the 2019 SECURE Act extended the deadline to adopt a Solo 401k plan from the end of the year to the business tax return deadline including any timely filed extension, the IRS has not yet updated its prior guidelines stating that employee contributions must be elected by the end of the year.
Therefore until the IRS issues final guidance, the conservative approach is to adopt the plan by 12/31/2020 to ensure that both employee and employer contributions can be made for 2020 in 2021 by your business tax return plus extension.
Entity Type is a Sole Proprietorship or C-corporation
For example, if your self-employed business entity type is a sole proprietorship or C-corporation, and you want to establish a solo 401k plan for the 2020 tax year, you can wait to open the solo 401k plan by October 15, 2021.
Entity Type is a Partnership or S-corporation
If your self-employed business is a partnership or S-corporation, the 2020 solo 401k plan establishment deadline is September 15, 2021.
The following chart outlines the year 2020 solo 401k establishment deadline by entity type and tax status:
The Reason for the Change
The purpose of this extension to open the solo 401k plan is to give owner-only businesses more time to determine if a solo 401k plan is right form them. The increased deadline to open a solo 401k plan now aligns with the SEP IRA establishment deadline.
Does the SECURE Act Allow me to Open a Solo 401k for 2019 QUESTION:
Can I open a solo 401k for 2019 since the passage of the new Act?
Unfortunately, no, but if you qualify for a solo 401k plan (e.g., you are self-employed, etc.) you can open a solo 401k plan in 2021 for 2020 as long as the solo 401k plan is opened by your business tax return due date including timely filed business tax return extension.